Bankruptcy in a Community Property State
There are two related questions that commonly arise in community property states when one spouse decides to file an individual bankruptcy petition without being joined in the petition by their spouse.
Question: If one spouse is filing an individual bankruptcy petition, is the other, non-filing spouse's property part of the estate? Does the chapter matter?
Answer: In a community property state, yes, and it doesn't matter which chapter the spouse files under. Section 541 of the Bankruptcy Code provides that "(a) the commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. (2) All interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is-- (A) under the sole, equal, or joint management and control of the debtor; or (B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable."
This means that, in community property states, both halves of any non-exempt community property must be included in the estate and will be available to pay community creditors accordingly. But note: "A non-debtor spouse's share of the community property may not be available to pay creditors in the bankruptcy estate if there are no community claims." In re McCoy, 111 B.R. 276 (B.A.P. 9th Cir. 1990).
Question: What about exemptions though? The non-filing spouse has to give up community property entirely but, because only one spouse is filing, can the couple still receive the benefit of combined exemptions?
Answer: In Arizona, yes. The underlying rationale is that, in taking advantage of both exemptions, the filing spouse is acting for the benefit of the community. There is little doubt that it also just seems intuitively fair.
The ability of an individual debtor to claim both spouses' exemptions is best explained by the seminal Arizona case In re Perez, 302 B.R. 661 (Bankr. D. Ariz. 2003): "the Bankruptcy Code permits states to exempt community property from community debts, and Arizona law permits one spouse to assert the community exemptions on behalf of the community. . . . In fact, the Code may permit a debtor to assert state law exemptions on behalf of a non-filing spouse. While only the debtor may claim the exemptions, in an opt-out state the exemptions that the debtor may claim are to 'property that is exempt under ... State or local law ....' 11 U.S.C. 522 (b)(2)(A). Thus the Bankruptcy Code itself does not limit the Debtor to claiming exemptions that would be available under state law if he were a single person. Instead, the Code permits the Debtor to claim as exempt any property that "is exempt" under state law. Thus the proper question is whether, under state law, the Debtor could claim that the property "is exempt" from community debts by asserting not only his own, but also his wife's exemptions. Under Arizona law, the amount of personal property exemptions of the two spouses is generally double the amount that each spouse could claim as a single person. There is nothing in Arizona law that prohibits one spouse from asserting both exemptions. To the contrary, A.R.S. 25-215(D) provides that 'either spouse may contract debts and otherwise act for the benefit of the community.' Here, there can be no doubt that the filing spouse, in claiming his non-filing spouse's exemptions, is acting for the benefit of the community."